The Real Estate Sector and Our Future
People's desire to protect their future motivates them to invest in Pakistan's real estate market. However, due to the previous government's high taxes on the real estate sector, investment trends have slowed, resulting in the sector's complete obliteration. Even as foreign direct investment shrinks and infrastructure spending remains scarce, Pakistan's real estate market plays a significant role in economic growth. According to the World Bank, the real estate sector accounts for 60–70% of the country's wealth, or USD 300–400 billion.
After agriculture, it is Pakistan's second most important source of employment. Apart from direct employment, it also boosts demand in over 400 different industries, ranging from construction (cement, steel, paint, building materials, architects, and urban planners) to financial services (house financing). As the government has increased the amount of various taxes, particularly in the areas of sale and purchase, strict measures have been implemented to prove the money-trail behind investments made in the last three years. As a result of the severe economic crisis that has hit this industry, many real estate consulting offices have closed, and millions of people who work in this industry are now hungry.
The Market Is Overly Regulated
The FBR's strict regulations (ban on non-filers, compulsory registrations when purchasing property worth more than PKR 5 million, and high property transfer taxes) have deterred investors. Financial markets are volatile, but it isn't the economic signal you may imagine. However, the myth that real estate agent makes a lot of money as an investment option persists. This is not the case. Real estate agency fills the void left by financial markets in most countries.
Unfortunately, due to excessive regulation by the government and the FBR, this sector is unable to do so. Take the KSE-100 index and the house price index (Figure 1 below). Housing prices returned a high cumulative return compared to the KSE-100 for only three years between 2011 and 2019. The KSE-100 index has climbed by 230 percent over the same time span, while home prices have increased by 147 percent.
From 2012 to 2015, the real estate sector in Pakistan experienced certain cycles, with annual returns of 16 percent, 25 percent, and 14 percent, respectively. The return on the housing index in all other years has been in the single digits, ranging from 1% to 9%. The KSE-100 index, on the other hand, is more volatile and offers both large returns and high losses; in 2016, it gained a 42 percent return and lost 19 percent in 2017.
Real Estate Market After 2018
Following the change of rule in 2018, the real estate market has had a tough time. It has had to deal with financial, economic, and political difficulties, as well as a variety of policy issues and a lack of confidence. It barely made it through the previous recession, thanks to huge investments from Pakistanis living abroad. Due to currency rate gains for foreign investors, the depreciation of the Pakistani rupee made property investment cheaper.
Over 30 percent of traffic on Zameen.com comes from Pakistanis looking for investment from abroad, according to the website. However, investing in real estate is already risky, as Pakistan is currently ranked 120th out of 129 countries (with a score of 3.9/10). For international investors, this type of ranking is quite crucial. Thousands of foreign investors have moved their money elsewhere because of the uncertainties and tax policy. These countries (for example, the United Arab Emirates and the United Kingdom) are providing better incentives, resulting in a decrease in the volume of foreign exchange used for real estate investment.
Pakistan received USD 21.84 billion in remittances in the fiscal year 2019-20, according to the State Bank of Pakistan. Because they encounter restrictions in doing other operations, the majority of their international investments are in real estate. Overregulation of the real estate sector deters foreign investors and could reduce remittances to Pakistan. Additionally, the government's stance of not using development budgets has caused this sector's activity to shrink.
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